Updated from 9:41 a.m. EDT Fisher Scientific International ( FSH), the top seller of science equipment and supplies in the world, said Thursday that it will buy troubled medical supplies distributor PSS World Medical ( PSSI) in a stock deal valued at about $840 million. PSS also reported fourth-quarter results that drastically missed Wall Street's expectations. Its financial troubles, however, underscore the reason the company put itself up for sale in January.
Shares of Fisher ended down 9 9/16, or 25%, to 28 7/16 in Thursday trading, while shares of PSS fell 2 13/32, or 24%, to 7 15/32. PSS shares rose 42% between Jan. 25, the day the company proclaimed it was for sale, and Wednesday. In the year before Jan. 25, PSS shares had dropped 59%. Under the terms of the agreement, Fisher will pay 0.3121 a share of its stock for each share of PSS. Based on Fisher's closing price Wednesday, that translates to stock valued at $11.86, a 20% premium over PSS' closing price Wednesday. That premium may seem high in light of PSS' results. Those results revealed that "operating problems are deeper than expected and the financials are much messier than expected," said David Risinger, an analyst at Merrill Lynch. He rates PSS a near-term and long-term accumulate and his firm has done no underwriting for the company. The decision to sell PSS came after the Jacksonville, Fla.-based company reported disappointing third-quarter results, "the third major disappointment in the past two years," Risinger said. "That was the final straw for the management team and board of directors." One of the major problems concerned Gulf South Medical Supply, a supplier to nursing homes acquired by PSS in 1998. "They were never able to get that acquisition to run correctly," Risinger commented. "There were operating difficulties. Also, the long-term care market has been experiencing severe financial pressure that's made it a difficult business to operate in." Patrick Kelly, chairman and chief executive of PSS, and Hugh Brown, a member of PSS' board of directors, will both join the Fisher board of directors. The transaction is expected to be completed in the fourth quarter. The acquisition enables Fisher, based in Hampton, N.H., to expand into a new market, health care, that is related to its existing business. The combined company projects revenue of $4.8 billion, Ebitda (earnings before interest, taxes, depreciation and amortization) of $352 million and earnings per share of $1.75 for fiscal year 2001. Fisher "has a proven track record of improving the performance of troubled companies," Risinger added. "And it knows how to run distribution companies." The transaction is expected to add to earnings per share in the first year, according to Fisher. It is also expected to reduce Fisher's leverage from about 4.7 times Ebitda to 3.9 times Ebitda. Pre-tax cost savings should amount to about $30 million over the next three years. Lazard Freres represented Fisher in the deal, while Donaldson, Lufkin & Jenrette Securities represented PSS. For the fourth quarter ended March 31, PSS reported a net loss of $10.8 million, or 15 cents a diluted share, compared with net income of $12 million, or 17 cents a share, a year earlier. The consensus estimate of analysts polled by First Call/Thomson Financial was income of 21 cents a share. Including special items, the company reported a loss of $15.7 million, or 22 cents a diluted share. In addition to special items, PSS took $27.4 million in write-offs and other charges, including $11.5 million for write-offs, reserves and costs from receivables in the nursing home business. Revenue rose 8% to $443.4 million from $410 million a year ago.